Support

A cookie is a piece of data stored by your browser or device that helps websites like this one recognize return visitors. We use cookies to give you the best experience on BNA.com. Some cookies are also necessary for the technical operation of our website. If you continue browsing, you agree to this site’s use of cookies.

The U.S. Court of Appeals for the Second Circuit upheld a district court that refused
to appoint a substitute arbitrator when the arbitrator designated in a contract became
unavailable. The court, saying it's bound by a 1995 ruling on that question, said
the federal circuits have come to different conclusions on what to do in such cases.

The decision, if it stands, allows plaintiff Deborah Moss to resume her putative class
suit against First Premier Bank of South Dakota and Bay Cities Bank of Florida. The two
banks served as the originating depository financial institutions for a payday loan
that Moss obtained from SFS Inc., an online payday lender.

Moss alleged violations of the Racketeer Influenced and Corrupt Organizations Act
(RICO) against the two banks, saying they “facilitate payday loans to consumers residing
in states that banned the practice and collect usurious interest rates in violation
of state law.”

The banks moved to compel arbitration, citing an arbitration agreement that named
the National Arbitration Forum (NAF) as the arbitrator.

Arbitrator Unavailable

However, the NAF declined to handle the case, saying it was barred from doing so by
a 2009 consent judgment reached with Minnesota authorities, which had alleged consumer
fraud by the NAF.

The district court declined to appoint a substitute, saying the contract identified
the NAF as the exclusive arbitrator, and the Second Circuit agreed, citing its own
1995
ruling in
In re Salomon Inc. Shareholders’ Derivative Litig., 68 F.3d 554 (2d Cir. 1995).

According to the court, the arbitration agreement requires certain action by and involving
the NAF, and makes no provision for appointment of a substitute arbitrator.

“In view of this mandatory language, the pervasive references to NAF in the agreement,
and the absence of any indication that the parties would assent to arbitration before
a substitute forum if NAF became unavailable, we conclude that, as in
Salomon, the parties agreed to arbitrate only before NAF,” the Second Circuit said.

Circuits Split

The decision is the first on the question by the Second Circuit in recent years, according
to Darren T. Kaplan of the Darren Kaplan Law Firm in New York, who represents Moss.

“It’s been a long time since the Second Circuit has looked at this issue, and in the
meantime, a lot of other circuits have wrestled with it as well,” Kaplan told Bloomberg
BNA Aug. 29. “In my mind, the majority view with which the Second Circuit joined is
clearly the better view. You shouldn’t force someone to go somewhere else to arbitrate
when they've already agreed to an exclusive arbitrator, because now you’re essentially
rewriting the contract.”

Kaplan also said there's the possibility of a petition to the U.S. Supreme Court.
But according to Kaplan, unless the Supreme Court grants a petition, the case returns
to the district court where Moss will take up her lawsuit again.

CFPB Proposal Highlighted

The case highlights a May proposal by the Consumer Financial Protection Bureau (CFPB)
that would prohibit arbitration provisions that bar class-action suits, Kaplan said.

“This is exactly the problem they’re looking at,” Kaplan said, referring to the CFPB.
“You have allegations of major violations of federal and state law, but it’s not economically
feasible for an attorney to represent just one of these borrowers in a lawsuit. On
the other hand, as a class case, it becomes economically viable and borrowers can
find attorneys willing to represent them in vindicating their rights.”

First Premier Bank and Home Bancshares, which acquired Bay Cities Bank in 2015, did
not immediately respond to request for comment.

First Premier is represented by Bryan R. Freeman of Lindquist & Vennum in Minneapolis,
and Bryan C. Meltzer, who worked on the case while at Herrick Feinstein in New York
but has since joined Feuerstein Kulick.

Megan A. Pierson and Eric Rieder of Bryan Cave in New York represented Bay Cities
Bank.

To contact the reporter on this story: Chris Bruce in Washington at
cbruce@bna.com

To contact the editor responsible for this story: Seth Stern at
sstern@bna.com

All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to books@bna.com.

Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)

Notify me when updates are available (No standing order will be created).

This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to research@bna.com.

Put me on standing order

Notify me when new releases are available (no standing order will be created)